Though shares of Netflix (NFLX 1.18%) soared during the first half of the year as the company's subscriber growth accelerated sharply amid stay-at-home orders, the stock has leveled off since mid-July.
One analyst, however, thinks the growth stock could move sharply upward over the next 12 months. Here's what's behind his bullish take -- and why his optimism for the stock may make sense.
Why the growth stock could rise 21%
Shares of Netflix could rise to $650 over the next twelve months, according to a recent note to investors from Morgan Stanley analyst Benjamin Swinburne. He expects a combination of top-line strength, operating profit improvement, and multiple expansion will move the stock higher.
Netflix clearly saw a short-term boost in its business earlier this year when consumers sheltering at home signed up for the streaming service in record numbers. Swinburne thinks 2020 conditions could have a more lasting positive impact on Netflix. The analyst predicts that a shift in consumer behaviors toward streaming will be a meaningful driver for the company.
Swinburne notes that despite Netflix's strong momentum and a potential acceleration in streaming adoption, its valuation multiples haven't improved recently. The company's price-to-sales multiple of 10 today is about in line with where it has trended for the past three years. Netflix's price-to-earnings ratio has declined from 160 three years ago to 86 today.
While these valuation multiples might seem too pricey at first glance, a closer look reveals that Netflix's valuation today may represent a good buying opportunity.
Net income could soar over the next five years
The current consensus analyst forecast calls for Netflix's earnings per share to grow at an annualized compound rate of 50% over the next five years. That puts Netflix's high price-to-earnings ratio into perspective.
Even though the company is trading at 86 times trailing-12-month earnings, it's priced at only 59 times 2021 earnings --- and just 50 times the most bullish analyst's forecast for earnings per share of $10.63 in 2021. These figures further highlight that Netflix stock isn't as expensive as it looks.
If Swinburne is right and Netflix can demonstrate another strong year of top-line growth as a global behavioral shift toward streaming catalyzes Netflix's growth, then the streaming-TV giant's stock starts to look like a good buy today. Swinburne further believes Netflix can "break out" of its current trend of growing operating margin by approximately 300 basis points annually, boosting the key profitability metric even faster.
While it's difficult to know where Netflix stock will be trading in one year, Swinburne has some good points about the attractiveness of the streaming giant's stock today in relation to its long-term prospects.